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September 27, 2013

3 Big Hiring Mistakes for RIAs to Avoid

As their firms grow, principals should add these two key positions, TD Ameritrade says

By less, they means less time on overseeing internal meetings and less time on smaller accounts. They claim principals can potentially accelerate their firm’s growth by adding two key positions — dedicated management and an associate advisor — that give them more time to go out and bring in new business.

The white paper, titled “Breakout Growth: Adding Key Positions to Unlock Growth Potential,” finds that firms with a dedicated manager produced 36% more income per owner and 41% more operating profit per client than firms where advisors do double duty as business managers, the research showed. Likewise, firms with an associate advisor earned 44% more income per owner and added clients 15% faster than firms without.

Adding talent isn’t enough, however, according to the white paper: “principals need to carve out clear job roles, create a framework that can support a far bigger enterprise down the road and then have the courage to step aside.”

“Putting everyone in the firm, especially the founder, to their highest and best use is the end game,” Christine Gaze, TD Ameritrade Institutional’s director of practice management, said in a statement. “RIAs that effectively deploy these two key roles create opportunities for a productive shift in focus of the lead advisors, which can produce dramatic results.”

Three common missteps RIAs make, she said, involve having unrealistic expectations for your new associate advisor; hiring a business manager but then not trusting them to manage the firm; and hiring managers who are not capable of building and running the bigger company you envision.

Throwing new hires into the deep end: Gazenotes thatmany principals, themselves the product of Wall Street’s ‘sink or swim’ culture, expect new hires to immediately get up to speed and so they often become frustrated when they instead see a cost center that is not generating revenue, according to the paper. Yet associates can create tremendous value by freeing the lead advisor to spend more seeking new business. Firms that don’t take the time to develop new advisors only ensure they will suffer expensive turnover.

“When the principal has unrealistic expectations, it sows the seeds for a toxic work environment,” Gaze said. “Principals need to regard the associate as an investment for the future, a seed that needs to be watered and cultivated.”

Holding on for too long: Gauzeargues that adding an operations manager or chief operating officer isn’t overhead: dedicated managers hold the fort so that the senior advisor can focus on strategy and attracting more assets. Consider that half of U.S. RIA firms generating $1.5 million in annual revenue have one or more dedicated managers, but among firms generating at least $3.5 million, 90 percent have professional management.

The challenge for principals is moving over and letting their new manager take the wheel. It is not always a comfortable transition for RIA principals, many of whom are entrepreneurs who wanted to be the boss and spent years building their own business. As a result many firms postpone hiring dedicated management until they get “bigger,” but these firms may wait too long and see growth stall as bottlenecks form around the owner.

Fighting yesterday’s war: Firms also can hurt themselves if they hire people who may be capable of running the business that exists today, but don’t have the skills and leadership qualities needed in a bigger, more complex enterprise. Hiring the dedicated manager is instrumental in leading the firm to breakout growth and avoiding frustration.